A national restaurant chain settled SEC charges for material omissions in its public disclosures. This is the first settlement in which a public company was charged for misleading investors about the impact of the COVID-19 pandemic on its business operations.
In its Order, the SEC alleged that the national restaurant chain filed disclosures in March and April which failed to sufficiently inform investors of its financial problems resulting from the COVID-19 pandemic. In its March 23 and April 3 Forms 8-K (referred to as business and sales "updates"), the company announced that it had transitioned to an "off-premise model" (i.e., to-go and delivery) under which those sales were "accelerating" and enabling the company's restaurants to operate "sustainably at present." The company failed to disclose that it had taken significant steps to conserve cash and increase liquidity in the near-term - including notifying its landlords that it would not be paying April rent, and was reducing compensation for executive officers, its Board of Directors and certain employees. Moreover, the company's updates did not disclose that it was losing $6 million in cash each week. As a result, the SEC alleged that the company's March 23 and April 3 disclosures were materially false and misleading.
Without admitting or denying the SEC's findings, the company entered into a settlement agreement for violations of Section 13(a) of the Exchange Act ("Periodical and other reports - Reports by issuer of security; contents") and SEA Rules 13a-11 ("Current reports on Form 8-K") and 12b-20 ("Additional information") thereunder.
To settle the charges, the company agreed to (i) cease and desist from future violations and (ii) a $125,000 civil money penalty.
Commentary Kendra Wharton
The SEC began warning public companies as early as March that they should carefully consider disclosures regarding the impact of the COVID-19 pandemic on their business operations, while also providing some level of reassurance that its staff would not second-guess good faith attempts to provide the market with "appropriately framed forward-looking information." In particular, the SEC encouraged companies to provide additional guidance on their liquidity positions and expected financial resource needs. Yet many companies - like this national restaurant chain - have struggled with difficult questions regarding how to frame the evolving challenges they face. This may be the SEC's first settlement concerning COVID-19 disclosures, but it is unlikely to be the last.
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